The events of 2020 were the toughest test all investment classes have faced since the 2008 financial crisis, and interval funds were no exception. Many funds experienced outflows far higher than normal and were compelled to pro-rate investor redemptions to lower percentages than demanded.
Even in the face of substantial outflows, many interval funds have weathered the storm and continued to deliver solid returns. The category is back on its growth trajectory, and more fund launches are likely as sponsors seek a viable way to expand their alternatives offerings. Mass affluent retail investors are looking for income-generating strategies that can also deliver alpha—with returns that are not correlated to the broader markets—and are willing to live with less frequent liquidity without giving up transparency.
Asset managers will face unique hurdles in adopting this product structure. For interval funds to achieve sustainable growth, there are four basic challenges that need to be addressed:
Strategy and Brand Fit A closed-end product structure will need to integrate with the firm’s broader product and distribution strategy.
Distribution and Advisor Education Understanding the advisor and broker-dealer decision-making process is critical in the sale of any financial product.
SolvingOperationalConsiderations SS&C focuses on providing solutions that affords asset managers and dealers the flexibility to choose the best DTCC platform for their specific product offerings. At SS&C, we created and offer both AIP and Fund/SERV solutions to support delayed tender and proration activities.
PricingandTransparency Operating an interval fund is likely more costly than operating a liquid alternatives fund. Finding an equitable balance will be paramount for market adoption. Firms need to be very clear on all features, fees and the liquidity of the product. Transparency on these details assists in education and reduces the risk of surprises among advisors.